# Extra payments toward mortgage or student loans?

So I have roughly \$5000 in student loans at 5% and about \$65000 on my mortgage at 3.875% (5/1ARM). Should I put extra payments towards the student loan or the mortgage?

5% is higher, so if it's really a matter of playing off the higher interest rate that would be it, but it seems like the mortgage is a lot more "top-heavy" (not sure of the proper term) with most of the interest in the beginning and principle later on, so payments early on would have a bigger effect than later on.

Edit (originally a comment but felt it should be part of the question):
Paying the highest interest first seems to make the most intuitive sense, and that's what I hear the most, however when I plug in to interest calculators, it shows that on the 5% student loan I'll be paying \$1000 in interest making min payments, so hypothetically if I pay that off right now in one lump sum I'd be saving about \$1000. On the other hand, if I instead take that amount of put it towards my mortgage, the calculator for that shows I'd save \$10,000 in interest over min payment (over the lifetime of the loan).

Am I missing something?

• Can you provide more details such as how much time is remaining on the loan? Monthly payments, etc? I can just show you the calculated difference in Excel – Joe Phillips Oct 2 '10 at 17:18
• 7 year on the stu loan, at min payment of 74.25. 29.5 year on the mortgage with 323.2 min payment (not counting insurance etc, just principle and interest) – Davy8 Oct 2 '10 at 17:42
• @Tim So I inferred, but why isn't it apples to apples? I'm fairly convinced it isn't, I just don't understand why, and what would be an apples to apples comparison? – Davy8 Oct 3 '10 at 15:12
• @Tim If you could elaborate on that in an answer with a concrete example I could accept it. I read the link you gave and skimmed through the follow up page and have a vague understanding but my brain's not cooperating this morning so it's still kinda hand-wavy in my head. In short what I gather from what you're saying is that it's not just a matter paying off 5k right away, but also if I pay off the student loan, that means that the money that normally goes to that can be put towards the mortgage and I need to factor that into the calculation? – Davy8 Oct 3 '10 at 16:42
• The current accepted answer is good from a fixed rate perspective. Small twist in this Q though is that your mortgage is on a 5/1 ARM. If interest rates rise against you after the teaser period is up, the interest rate on the home will increase along annually. While it is good to pay off the higher interest now, it is possible that the house could have a much higher interest in the future of its lifetime, which could wipe out any savings you make now. Best thing to do would be after student loans are paid, to pay off the mortgage as best you can, or refinance the loan if it makes sense. – Shorlan Jan 10 '19 at 23:14

Pay off the Highest interest loan rate first. You must be doing something funky with how long your terms are... If you give a bit more info about your loan's such as the term and how much extra you have right now to spend it could be explained in detail why that would be the better choice using your numbers. You have to make sure when you are analyzing your different loan options that you make sure you are comparing apples to apples. IE make sure that you are either comparing the present value, future value or amortization payments...

EDIT:

using some of your numbers lets say you have 5000 dollars in your pocket you have 3 options. excel makes these calculations easier...

Do nothing:

in 80 months your Student Loan will be payed in full and you will have 54676.08 owing on your mortgage and 5000 in your pocket(assuming no bank interest)

for mortgage:

``````FV(3.875/100/12,80,-323.2,65000)
``````

Pay off Student loan and allocate Student loans amortization to Mortgage: in 80 months you will have \$47,910.65 owing on mortgage and student loan will be paid in full

For mortgage:

``````FV(3.875/100/12,80,-397.45,65000)
``````

Pay 5000 on Mortgage:

in 80 months student loan will be paid in full and you will have \$48,204.92 owing on mortgage

For mortgage:

``````FV(3.875/100/12,80,-323.2,60000)
``````
• Not to confuse you more, But it might be more beneficial to just put the money into an other investment. 5% and 3.44% interest rates are relatively low. You may find even a larger return on your money if you were to invest it into a RRSP. You may be able to save around 300 dollars on the 1000 depending on your marginal tax rate – Rick Oct 4 '10 at 18:08

Pay off the highest rate debt. Interest on both are charged on the balance owed, nothing more complicated than that. There are those who would call a mortgage "front loaded" but that's nonsense. Of course most of the payment is interest at the beginning because the debt is higher and you start with a 30 year term. The fastest way to pay off multiple debts is always from highest rate first and then the next and so on.

• That seems to make the most intuitive sense, and that's what I hear the most, however when I plug in to interest calculators, it shows that on the 5% student loan I'll be paying \$1000 in interest making min payments, so hypothetically if I pay that off right now in one lump sum I'd be saving about \$1000. On the other hand, if I instead take that amount of put it towards my mortgage, the calculator for that shows I'd save \$10,000 in interest over min payment (over the lifetime of the loan). Am I missing something? – Davy8 Oct 2 '10 at 13:56
• Yes, the "total interest" number is meaningless. What you need to consider is the monthly interest cost of \$1000 of each loan. You see, the fact that a mortgage runs 30 years (for example) means that \$100 paid or not paid today, will accrue interest over the full 30 years. To compare that to a short term loan ignores the time value of that money. On a 6% mortgage \$100 paid today (30 years early) will save you \$580. But your \$100 sent to an 18% credit card "only" saves you \$18? See? Comparing two time horizons is silly. – JTP - Apologise to Monica Oct 4 '10 at 0:32
• @JoeTaxpayer +1: In past I had a Auto loan for 3 years and Mortgage for 20 Years and made the same calculation and paid off more of Mortgage as the total interest saved is more. But you are bringing in the prespective of Present Value and Future Value of money. If you can put the Future Value of \$18 saved on credit card over 30 years maybe it will bring more clarity. – Dheer Oct 4 '10 at 9:39
• @Dheer exactly, what is (and how do I calculate) the future value of paying off the student loan first? How can I calculate what I'd really save over the course of 30 years by paying off the student loan first vs paying the same amount on mortgage? I get the general principle but how can I translate it into real \$'s so I can get a better understanding? +1 for now, and I'll accept if you can answer that as well. (Sorry it took a while to figure out what my real question was) – Davy8 Oct 4 '10 at 12:51
• Well, starting from the the 2nd sentence of the last comment was @JoeTaxpayer – Davy8 Oct 4 '10 at 12:52

As other's have said, paying off the student loan first makes the most sense because of

• the higher interest rate
• the unsecured debt
• it cannot be wiped out by bankruptcy

That said, are you planning on staying in your house for a particularly long time? If so, refinancing your mortgage into a fixed-rate loan might be the best use of your money long term. Not sure how much time is left on your 5/1 ARM before the rate starts to float, but if rates rise, your mortgage could quickly become more expensive than your student loan.

One other factor to consider is that Mortgage debt can be wiped out in a bankruptcy, but student loan debt can not.

Financially it is simple math to figure out which one makes more sense to pay off based on the total expenditures on interest minus tax savings from deductible mortgage interest. However, in terms of risk it might be best to pay off the student loans first.

• Depends on the student loan - but typically the govt banks ones are not bankruptable. – Tim Oct 3 '10 at 4:04
• @Tim - Good point, I was specifically referring to Government loans not private loans. – JohnFx Oct 3 '10 at 16:38

I would pay off the student loans first because they are unsecured. Mortgage debt is against an appreciating asset and is therefore "better" than unsecured debt. I recommend you pay both off, but start with the unsecured student loans.

• this is odd advice. Most student loans are effectively secured as the govt loans never go away and are not bankruptable. Also, as a borrower it does not matter - in fact the secured loans are the ones you want to pay off - otherwise they seize your asset. You picked the "right" one to pay off but for totally incorrect reasons. – Tim Oct 3 '10 at 4:04
• @Tim My thoughts are that a secured loan has an asset that can "pay it off" in a pinch. If I get into financial trouble, I can sell my house to pay my mortgage. If I have unsecured debt and I get into financial trouble, there may be nothing to sell. This is also why secured debt typically carries a lower interest rate than unsecured debt. – Alex B Oct 3 '10 at 5:29

Pay the the smallest balance first. The sooner you pay that off, the sooner you can pay more on the mortgage.

• Ah, the snowball method. Won't save you the most \$\$\$, but since the student loan amount is so small compared to the mortgage, you could go for it if you find it motivational. :) – Steven May 22 '12 at 16:31
• Duff - it's common for a low interest card to have a low credit line, so one might have 5 cards at sub 10% with a 2000 balance on each. If that fellow has 10,000 on a 18% card as well, do you still feel paying the 5 smaller cards first is the way to go? – JTP - Apologise to Monica Aug 18 '13 at 19:08

I think the discrepancy you are seeing is in the detail of what happens once you pay off your student loan. If you take your monthly payment for your student loan, and apply that to your mortgage once the student loan is payed off, paying the highest interest loan will cone out ahead.

If, on the other hand, you take your student loan payment and do something else with it (not pay down your mortgage), you would be better off paying on your mortgage. Say you have \$1000 to put towards either loan, and there is 5 years to pay on the student loan, and 25 years to pay on the mortgage. By paying on the student loan you are, roughly, saving 5 years of 5% interest on that \$1000. By paying on the mortgage, you are saving 25 years of 3% interest.

Look at my answer here, and then calculate again. If you keep on saving and keep on paying off your highest interest rate loan, you'll be 'making' money.

Also look at this answer here for saving or paying back.

Basically, you should always calculate whether the money you have is better 'spend' in a savings account or as a return payment to your loan. Always tackle the highest interest loan first.

My 0,02€